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11 ways to protect and strengthen your credit
Key takeaways
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Check your credit reports annually for errors and pay all bills on time, as payment history is one of the most crucial factors in your credit score
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Keep credit card balances low and limit new credit applications to avoid temporary score drops from hard inquiries
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Use security measures like credit freezes, fraud alerts, strong passwords, and secure websites to protect against fraud
Having a good credit score opens the door to many financial opportunities that can save you money while providing a better quality of life.
For example, you might pay a lower interest rate on your credit cards because the card issuer has more confidence that you'll pay your bills. Also, if you take out a car loan, you might qualify for a better interest rate that would lower your monthly payments. In this article, we'll look at 11 ways of strengthening and protecting your credit.
What is credit?
In its simplest form, credit is the ability to borrow money from a bank, card issuer, or some other lender. You agree to pay the money back according to the terms of the loan, including making payments when they are due.
Credit has a larger context as well. When someone says you have "good credit," they're referring to the results of your credit report , which is maintained by three credit bureaus, Experian™, Transunion®, and Equifax ®. These credit reports indicate your creditworthiness.
Each bureau determines credit scores based on information in your credit report. These typically include your history of making payments, the length of your credit history, and your credit utilization which is how much available credit you're using.
Why your credit score matters
A credit score is a three-digit number that tells lenders how likely you are to repay a loan according to its terms. The higher the score, the better your debt management history. Lenders determine that their risk is lower, so they are more inclined to approve your application for credit and to extend better terms.
A good credit score can help you:
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Save money on interest charges by getting a lower interest rate on loans
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Receive better terms on credit cards, such as better cash back rewards, higher credit limits, and perks
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Get approval for a mortgage or for renting an apartment
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Pay less for insurance and avoid security deposits for utilities or pay smaller deposits
There are many good reasons for building and protecting your credit. And the good news is that these things are largely under your control.
The essential steps to building and protecting your credit
Taking control of your credit report and credit score isn't always easy, but it's worth it in the long run.
Some of these tips have to do with debt management, but many concern identity theft and financial fraud, both of which can damage your credit score and financial security.
1. Monitor your credit reports and accounts. This is one of the most important things you can do. Under federal law, you are entitled to one free annual credit report from each of the credit reporting bureaus every 12 months. A good place to start is AnnualCreditReport.com.
Credit monitoring involves looking for errors, such as an account that is reported as going to collection when it did not. Or maybe you sold your house and bought a new one, but the credit report doesn't show the first mortgage as paid off.
You should also look to make sure that no one has used your name and Social Security number to apply for credit. In an era of rampant identity theft and data breaches, it's critical to keep an eye on your accounts.
If you find an error, report it to the credit bureaus immediately. Their websites each have links for disputing information on your credit report. If you need help, the U.S. Consumer Financial Protection Bureau provides tips and guidance. This form of credit repair is a simple way to improve credit scores.
By the same token, review each monthly statement from your monthly bank and credit card accounts for unauthorized charges. Contact the bank or card issuer immediately about any discrepancies you see.
2. Pay bills on time. Payment history is one of the most important parts of your credit score. It's essential that you consistently make payments on time.
Credit card payments are due on the same day each month (or the nearest business day). If you're afraid of forgetting, set up an autopay option with your bank or the card issuer.
Autopay can also be useful for staying on time with the utilities, rent, and car payments. If you're struggling to meet your payments each month, you may benefit from credit counseling.
3. Keep your balances low. Another key component of your credit score is credit utilization. It's the amount you owe on a credit card, or another revolving account, divided by your available credit.
If you're close to maxing out your credit cards, your credit utilization might approach 100%. It indicates that you might be having trouble paying off your debt, and the high percentage could lower your score.
If you can pay the full balance on your credit card accounts each month, your credit utilization may be close to 0%.
4. Limit your applications for new credit. Every time you apply for a new credit account, whether it's a credit card, installment loan, or car loan, the lender will make a "hard inquiry" of your credit report.
Too many of these in a short period of time may temporarily impact your credit score. That's why you want to spread out applications by six months, ideally, or at least 90 days.
If you're planning to apply for a mortgage, it's even more important to hold off on acquiring a new credit card or some other debt. You want to avoid anything that might hurt your score, even a little, and cause you to pay a higher interest rate on such a large, long-term loan.
5. Institute a credit freeze. You can keep a scammer from trying to apply for credit using your personal information by instituting a credit freeze, also known as a security freeze, with the credit bureaus.
A security freeze stops the bureau from responding to a credit inquiry from a potential lender. However, the credit bureau won't notify you that a credit inquiry has occurred, so you need to still keep tabs on your credit reports. You also must contact each credit bureau to set up the security freeze.
There is no charge for instituting a credit freeze, and you can have it removed or temporarily lifted if and when you want to apply for credit.
6. Activate a fraud alert. A fraud alert notifies creditors and lenders that you may be a victim of identity theft or financial fraud. It prompts them to verify your identity before approving any new credit requests.
You can place a fraud alert on your credit report by contacting one of the three credit bureaus, and it must notify the others. It’s completely free to place a fraud alert, and you can remove it at any time.
7. Secure your information. It's difficult these days to keep information private when it seems that every company wants your email address and to keep a credit card on file. But there are some actions you can take. For example:
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Shred rather than toss paper with sensitive information
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Don't carry your Social Security card around
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Don't leave sensitive information in your car, even if it's locked
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Sign up for paperless billing and account statements to minimize the chance of mail fraud
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Sign up for online access to your accounts and watch them for signs of irregularities
8. Watch out for scams. Artificial intelligence (AI) creates many new ways for fraudsters to scam you out of your money, create fraudulent accounts, and potentially damage your credit score.
The Federal Trade Commission lists four signs that you could be dealing with scammers:
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They pretend to be from an organization you know
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They say there's a problem or that you have won a prize
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They pressure you to act immediately
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They tell you to pay in a specific way, such as gift cards
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Sign up for online access to your accounts and watch them for signs of irregularities
9. Use strong passwords. Think of your password as the last line of defense between you and a thief. Certain browsers provide strong passwords, which they remember so you don't have to. You might also have the option of using a password manager. Either option can help you protect your financial information and accounts.
If you're making your own passwords, they should be at least 8 characters, contain a mix of letters, numbers, upper and lower case, and symbols, and not contain a recognizable word or name. Try using different passwords for different sites, too.
10. Secure your devices. It's easy to always lock your cell phone and not leave sensitive information on a public computer, such as in a library.
It's harder to secure information when thieves can use Radio Frequency Identification scanners (RFID) to virtually steal information off contactless items like passports and credit cards. Fortunately, plenty of wallets and handbags these days are designed to block RFID fraudsters.
11. Use secure websites. If your browser alerts you that "this website isn't safe," don't go there. Only use websites that start HTTPS, showing they have SSL, an internet encryption protocol.
FAQs
Checking your own credit score has no positive or negative impact on it. However, if a lender checks it, this may result in a hard inquiry and might cause a small, temporary dip in your credit score.
If a credit bureau makes an error on your credit report, it can be corrected relatively quickly (sometimes within 30 days) to boost your credit score. If you make a mistake (like not paying your bills on time), the process could take much longer, from a few months to several years, depending on the seriousness of the error.
To build credit, it generally helps to have at least one credit card. Beyond that, the right number depends on your circumstances. It's safe to say: No more than you can use responsibly.
However, two or three cards might be useful. It could help you maintain a lower credit utilization ratio, for example. Managing multiple accounts well also indicates to lenders that you understand how to use credit responsibly.